The Nintendo Difference

Why the patriarch of gaming will never follow Sega's path.

No company frustrates the soothsayers quite as much as
Nintendo. Across the land, divining rods are being snapped,
crystal balls are being smashed and tea leaves are being
stamped on in fury - as the firm whose death has been
predicted countless times reveals itself once again to be in
rude good health and ready to take on the world.

I refer, of course, to the launch of the Wii in Europe, which
saw the firm clocking up a record breaking 325,000 sales over
the weekend; but even more astonishing, and more laudable, is
the stunning success of the Nintendo DS in the same week.
Over half a million units of the handheld were sold in Europe
last week, and the installed base now tops 8.5 million units
in this territory alone. If this is an indication of how the
Wii's sales will go, then Nintendo's risky gamble with the
motion sensing Wiimote could actually turn out to be the
stroke of genius which hands dominance of the console space
back to its one-time master.

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As the Kyoto-based firm continues to confound the
doom-mongers who have gleefully predicted its demise for the
best part of a decade, it's worth pausing for a moment to
think about the other common prediction which is associated
with Nintendo - namely that the company will (or at least,
should) abandon the hardware market entirely, and instead
focus on bringing its unique range of IPs and franchises to
other platforms. Going third-party - or "doing a Sega", as
industry slang would have it.

The most common argument for this strategy is that while
Nintendo may be hugely profitable, the company's home
consoles are in distant second or even third place behind
those of the market leader - so in theory, by moving
franchises like Mario and Zelda to the PlayStation and the
Xbox, the firm would have a much larger target market, would
sell more units, and would ultimately be much more
successful. This is particularly relevant now, proponents of
this model argue, because the astonishing cost of the new
generation of consoles has forced Nintendo out of the arms
race, leaving its games confined to an innovative but
underpowered system.

On the face of it, it's a compelling argument - and it
certainly worked for Sega, which has turned around its
fortunes since bailing out of the Dreamcast (aided,
admittedly, by being acquired by wealthy Japanese gambling
firm Sammy) and is now one of the most influential
third-party publishers in the industry. Why shouldn't
Nintendo follow Sega's example, then, and leave the CPU and
GPU arms race to the multinational giants with cash to burn?

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The simple answer is because "The Nintendo Difference" isn't
just a cunning marketing slogan; Nintendo genuinely is
different. Its structure and business model are a radical
departure from how every other company in the interactive
entertainment industry works, and the comparisons between
Nintendo and Sega are merely skin deep. Sega left hardware
because it had no choice; the failure of the Dreamcast was a
nail in the coffin, and the structure of its internal studios
was perfect for transplanting into a third party publisher.
Nintendo stays in hardware because it, too, has no choice in
the matter.

Of course, on a very simple level, if Nintendo was to leave
hardware then it would lose a major revenue stream, because
the company notoriously designs and prices its consoles such
that hardware is a profit-making enterprise. Making up for
that lost revenue would also be tougher than it looks,
because as a third-party publisher, Nintendo would be forced
to pay a significant license fee on each game it sold, so its
profit margin from software would be reduced. As such, the
company would have to vastly increase its software sales in
order to make up both for reduced margins and for the loss of
the hardware revenue stream - an incredibly daunting task,
even for a firm with franchises like Mario and Zelda. Bear in
mind that those franchises already sell millions of copies,
and have an astonishingly high attach rate with Nintendo
hardware - even on a system with five times the installed
base, achieving higher sales would be a challenge.

Even more important, though, is the change which would have
to be made to Nintendo's entire culture, to its business and
creative models, if it were to abandon the hardware market.
Considering this gives an insight into the workings of one of
the most fascinating companies in the videogames market - a
firm which is quite unlike its competitors, with an approach
which owes more to that of a toy company than to the
videogame publishing model.

Nintendo's entire philosophy is focused on the platform - not
on hardware or software as separate entities or businesses,
but as the platform as a whole. Unlike Sony and Microsoft,
where it's apparent that Chinese walls have been erected
between the designers of the hardware and the creators of
first-party software, Nintendo actually places its top
software designers at the helm of hardware design. Consoles
are designed to suit the game concepts which will run on them
- a working model which is apparent in the design of both the
Nintendo DS and the Wii, and which allows the company to
create early first-party titles which really showcase the
hardware.

This top-down approach, which creates consoles based on the
games which will run on them, is the antithesis of Microsoft
and Sony's approach, which designs from the bottom up - first
creating a console and then worrying about what games will
run on it. It gives Nintendo an enormous competitive
advantage which would not be evident if it were a third-party
publisher, and allows its top first-party software to
innovate and evolve in ways which would be impossible on
another company's hardware. It's also the approach which has
informed the decision to restrain the specifications of the
Wii - and indeed the DS - to a manageable level, which allows
development to take place faster and less expensively than on
rival consoles.

These factors combine to make Nintendo into the company it is
today - a company whose low development costs, tight
integration between hardware and software and enormous profit
margins allow it to take creative risks, drive forward
innovation and promote the growth of the gaming market as a
whole. Without Nintendo's unique business model and
first-party status, games like Nintendogs, Brain Age, Animal
Crossing and Wario Ware simply could not exist; they either
rely heavily on the hardware which supports them, or are so
far off the beaten track that creating them on a system with
higher development costs and lower profit margins would be
commercially untenable.

That's why Nintendo will remain in the hardware business -
because its consoles are more than just a platform to run its
software on. They are part of a platform strategy which
defines the entire company's approach to the market, and
which means Nintendo is more than just one of the world's
leading videogame companies - it is also, and arguably more
importantly, one of the world's leading toy companies, and
remains a powerhouse of innovation and development which is a
driving force for the entire games sector. "Doing a Sega" is
not on the cards for this firm, and probably never will be -
especially not when it's still in the enviable position of
being able to shift the better part of a million units in
Europe in a single week.